Can GTSI make the switch to a services company?

EDITOR'S NOTE: This is part two of  a two-part interview with Sterling Phillips, the new president and CEO of GTSI. Click here for part one .

Sterling Phillips, who assumed the roles of president and chief executive officer at trouble-plagued GTSI Corp. just a week ago, in his first press interview spoke candidly yesterday about the Small Business Administration’s suspension and the future of the company. In the concluding portion of the interview, Phillips discusses how he will lead GTSI’s efforts to grow as a services provider and its troubled relationship with the Alaska Native Corporation Eyak and their joint venture Eyak Technology.

Q: You’ve mentioned that a number of people who were associated with the SBA allegations are no longer with the company, including, of course, your predecessor, Scott Friedlander. How many people were let go or left of their own volition? Can you provide a number?

Phillips: We had five people who left the company surrounding this incident, which includes my predecessor.

Q: Have others quit due to the low morale you cited? Traditionally, I know turnover of sales people such as GTSI’s is highest at the end of the federal fiscal year in September when they’ve made their yearly commissions and look elsewhere.

Phillips: We’ve had a number of people other than the five individuals that were associated with the SBA allegations leave the company since the allegations were made. That’s a relatively small number of people, number one. Number two, I don’t know how many of them left for one of the many reasons people leave their jobs and how many of them left because of the SBA activity. I am sitting here looking at a poster that says “[GTSI] one of the best places to work for 2009.” We have been by design, and I think it’s been accomplished, an employee-friendly company, and that’s been reflected -compared to our peers - in a relatively low turnover. We’ve seen more turnover in the last 60 days [than normal]. Some of that I’m sure is associated with the SBA claims, but it’s hard to say because of the seasonality which you mentioned.

Q: Is the goal still to make GTSI into a services company?

Phillips: Our goal strategically is to grow our services business at a very rapid pace. We think the existing base of business, where we have dozens and dozens if not hundreds of customer relationships, provides a good starting point to grow a services business. We think the relationships that we have with customers – and in some cases have had for many, many years – where we’ve performed well, developed their trust and confidence, we think that’s a good starting point to go compete for the services business that may be coming out of those agencies as well. So I guess I would categorize the strategy as to build on the existing base of contracts, client relationships and the existing sales force that has been more product-centric and use that as a contributor to our sales’ effort to grow on the services side.

Q: What do you see happening to GTSI’s relationship with Eyak, the Alaska Native Corporation that recently tried to buy the company and then withdrew its offer following the SBA suspension?

Phillips: That’s difficult to say. As you know they had extended a proposal to buy the company – this preceded me. I was not directly involved. And that was subsequently withdrawn. We’re currently working with them. We have a dispute with them with regard to certain rights, payments, etc., as part of a subsidiary that we jointly own. We have to adjudicate that. So I don’t see strategically that that’s going to be the basis for any major part of our growth. I also don’t see it strategically as an inhibitor to any part of our growth. So again, at Day 5, I have had relatively low-level involvement in any or this up to this point, but I see we’ve got some things that we’ve got to resolve in terms of the business relationship between the firms, but I don’t see that as having a material impact one way or another on our growth plans or our strategy going forward.

Q: Could you name the company you said you were both involved with?

Phillips: We have a joint venture called Eyak Tech. We’re a part owner, they’re a part owner. We have some contract disputes we have to sort out.

Q: One rumor is that you have come in to get the company in shape for sale. Your background includes leading Analex Corp. when it was sold to QineteQ North America in 2007. Any truth to that rumor?

Phillips: There is no plan or intent, and I have not been given any mission to sell the company. No. The only reason I won’t give you a blanket "no" is because we’re a publicly traded company. We operate in the interests of our shareholders. I have been in a situation before where, despite the desires of management or how well things are going in the board, etc., an offer came along that from a fiduciary point of view said is really in the best interests of the shareholders, so you go off and do it. So, there is no initiative at all under way by the company to sell the company. But as a public company if someone came in and made a rich offer that was clearly in the best interests of our shareholders, we’d have to seriously entertain that. But we think there is a good opportunity to grow this business and grow the share value. We don’t believe that the current share price, which the last time I looked was around $4.75, is reflective of the current intrinsic value of the business or the potential we could drive over the next two to four years if we execute our strategy.

Q: How has the reseller business changed since your days at Federal Data Corp.? What does it take now to be successful?

Phillips: I was at Federal Data in the mid-90s and GTSI has been around for more than 25 years. If you go back in time to when GTSI was founded, to the point when Fed Data was thriving, there were a couple of phenomena. One, government procurement for IT products was so cumbersome, more or less the same as the procurement system for aircraft carriers and submarines. So whenever a procurement happened, customers were motivated to put everything, including the kitchen sink, in it. And that created a natural play for people called systems integrators to bring products together from a wide variety of manufacturers, including in some cases services, and package that deal for the government because the government was going to do one buy and then three years later do another buy or something.

One of the things that’s happened in recent years is the government has really streamlined procurement. And today, they have everything right down to government-issued credit cards and 800 numbers and websites where a government user who wants to buy an IT product can go to market very quickly, very easily, very fast and buy that product from a variety of sources. So, one of the big value-adds that companies like Federal Data and GTSI used to provide was solving the problem of federal procurement. That problem has been dramatically reduced by the government with procurement reform over the last 15 years.

The second phenomenon that we’ve seen is that the government has made the procurement process more efficient. They’ve also relaxed some of the more onerous aspects of being a supplier to the government. If you look back about 20 years, there were a lot of big manufacturers who didn’t want to have anything to do with selling directly to the government. They didn’t want to touch it. And so from an OEM point-of-view there was a very valuable role for a middle man to buffer the OEM from the onerous aspects of being a government supplier.

Well, today you drive up and down the Dulles Toll Road and you’ll see the names of big hardware, software OEMs out there. Everybody’s got their own federal business unit. The reseller business in my opinion has gotten squeezed from both sides. The value to the government customer as a buyer has been diminished by the government’s own procurement reform, and the value to the OEMs has been diminished because the government has made it easier to sell to them directly.

So those of us who historically have played a role in the middle between the OEM and the government, our world has shrunk a little bit. The pressures on us have grown and that has put more pressure on margins, etc. So that’s one of the reasons that our business is committed to, while continuing to serve our customers who are looking for a product solution, building a services business that’s as big and robust and successful as our products business has been.

Q: You've been very candid and informative. Is there anything else you’d like to add?

Phillips: Let me just make sort of a summary statement. GTSI has almost 500 employees, the vast majority of whom were totally unaware of anything surrounding the incidents that are alleged by the SBA and all of whom were disappointed, saddened and surprised by the SBA action and the allegations that were behind that action. Those people are rallying today. We’ve got a good business with lots of customers today.

We’ve got a great growth initiative with the expansion of our services business and while certainly morale has taken a hit and in some cases our customer image has taken a hit, the reason I am here is I think we’ve got a great team, a great starting point and a great opportunity to continue to continue to build this business. My vision over the next three to five years is building a business that builds on and preserves the product resale business but while building much more aggressively a services business that will drive the bottom line much faster and having done that, drive the stock price harder.

GTSI Corp., of Herndon, Va., ranks No. 59 on Washington Technology’s 2010 Top 100 list of the largest federal government contractors.